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Lower forever: NZ stock prices take long-term to the extreme

May 15, 2016

Andrew Bascand: Harbour chief

Many New Zealand shares will need interest rates to stay at record lows forever to justify current prices, according to the latest Harbour Asset Management monthly report.

The Harbour note says the New Zealand share market is characterised by firms that have “high earnings certainty, but low earnings growth”.

“By market capitalisation, low volatility and high yielding stocks dominate the New Zealand market. In our view these stocks need interest rates to stay low in perpetuity to support their current stock prices,” the Harbour commentary says.

“Some of these stocks are also challenged by potential technological change, and it is hard in some cases to fundamentally support current share prices into the future.”

While Harbour rates NZ equities as “fully priced” the note says loose monetary policy across the world could keep the NZX at record levels over the short term.

“In a world of low interest rates investors continue to pay a premium for stocks with high earnings certainty and sustainable dividend yields,” the Harbour note says.

Despite such valuation concerns, Harbour says the NZ economic backdrop still favours corporate earnings growth with business confidence high both here and across the Tasman

“We continue to skew the portfolio towards offshore earners, because they have the highest relative growth prospects,” the note says.

Specifically, Harbour says its portfolio is weighted to “structural growth” companies in the healthcare, IT and non-bank financial sectors.

“We maintain this portfolio skew as these are the sectors with high earnings growth, whether economies are slow or strong,” the Harbour commentary says.

The note – authored by Harbour chief, Andrew Bascand, along with portfolio managers Craig Stent and Shane Solly – says while worries about Australian bank stocks have been “overstated”, the sector does look volatile and would face earnings pressures.

“Our preference is to look elsewhere for growth opportunities and we remain significantly attracted to the asset managers,” Harbour says.

Overall, the note says market volatility, driven largely by global monetary policy adjustments, looks set to return at higher levels than investors have become accustomed to over the previous three years.

“Sectors that benefit from positive structural change should continue to deliver relatively strong returns in such an environment,” the Harbour note says.